Self-directed IRAs are the most dynamic type of retirement vehicle, allowing IRA owners unlimited possibilities and opportunities. All kinds of retirement accounts qualify for self-direction. Investors can select from a broad range of assets permitted within a self-directed account. Savvy investors know the power of a Midland self-directed IRA.
Why should you self-direct an IRA? All income and gains in an IRA account are tax-deferred until distributions are made. With a Roth IRA, all income and gains are tax-free.
The term self-directed refers to the control that the IRA owner has to choose their investment options. Typically IRAs only allow you to invest in stocks and bonds. But with a self-directed account, you can select alternative assets. Alternative assets include real estate, futures, private placements, private stocks, lending, and gold. The opportunities are endless. Self-directed IRAs are invested solely at the discretion of the owner of that account. The account owner directs the account administrator, Midland, to purchase assets based on their authorization. The IRA owner is required to do all due diligence on all asset purchases.
Self-directed accounts can include Traditional, Roth, SEP, and SIMPLE IRAs. Educational plans (ESAs), health savings plans (HSAs), and 401(k)s can also be self-directed. Learn more about each type of self-directed plan.
Who Should Consider a Self-Directed IRA
Anyone who wants to control their retirement investments or purchase a specific alternative asset should consider a self-directed account. Typical IRA custodians only allow you to invest in the products they sell. With a Midland account, the possibilities are endless.
The IRS does not state which assets you can purchase in an IRA. The IRS does identify assets that cannot be purchased in an IRA. Click here for a list of self-directed IRA prohibited transactions and parties. Midland does not sell products or offer financial advice. Therefore, we do not limit your investment decisions. Midland’s goal is to encourage people to understand their investment choices and take control of their retirement accounts.
Examples of common alternative investments purchased within a self-directed account include:
- Real Estate
- Secured Notes and Mortgages
- Single-Member LLCs (Checkbook IRAs)
- Private Placements
- Private Stock
- Closely-Held LLCs
- Notes – Private Lending
- Hedge Funds
- Equities – Stocks, Bonds, & Mutual Funds
- Gold & Silver
Advantages of Investing With IRA Funds
There are three primary reasons why people invest using self-directed IRAs:
1. Alternate source of funding
You may not realize that IRA funds can invest in real estate, private loans, private companies, and more. You potentially earn higher returns than you would by investing in traditional investments such as stocks, bonds, and mutual funds.
2. Looking for higher returns
Investing through a brokerage firm or bank offers limited investment choices. Investors who are unsatisfied with the returns these investments provide often look for alternatives. Using a self-directed IRA allows investors to select assets they know and understand, leading to higher returns.
3. Tax-free or tax-deferred growth (time value of money)
When you invest using a self-directed IRA, you defer capital gains taxes when selling your investments. Reinvest these tax savings in assets that produce higher returns. Create higher account values in shorter time frames. Generate more wealth in your retirement account; self-direct your IRA today.
Investment Types Not Permitted Within a Self-Directed IRA
The IRS prohibits two investment categories: life insurance products and collectibles, which include:
- Works Of Art
- Alcoholic Beverages
- Metals (other than certain gold, silver, and palladium)
- Prohibited Transactions
Self-directed IRAs provide a great deal of freedom, flexibility, and choice of potential investments. However, they are also governed by a set of rules self-directed investors must be aware of and follow. There are also certain transactions (and, more specifically, individuals) that can disqualify an investment within your IRA. These prohibited transactions can defeat the tax benefits your IRA offers. They can subject the IRA to fines and penalties, as well.
Your retirement account should benefit you when you retire and not before. Transactions that can be interpreted as providing immediate financial gain to account holders are not allowed. Many of these arrangements are laid out in Section 4975 of the IRS code.
For example, IRA holders may not:
- Borrow money from their IRA
- Sell, exchange or lease property to their IRA
- Receive compensation for managing property in their IRA
- Use their IRA as security for a loan
- Transfer plan income or assets to disqualified persons
- Lend money to disqualified persons
- Extend credit on their IRA to disqualified persons
- Furnish goods, services or facilities to disqualified persons
- Allow fiduciaries to obtain or use the plan’s income or assets for their own interest
For most of the disqualifying arrangements outlined, the transaction involves the IRA and a disqualified person. Therefore, it is important to understand who is considered a disqualified person. These individuals include:
- IRA holder
- The IRA holder’s spouse
- The IRA holder’s lineal ascendants, lineal descendants, and spouses of lineal descendants
- Investment advisors and managers
- Any corporation, partnership, trust or estate in which a disqualified person has 50 percent or greater interest or in which the disqualified person maintains control as a president manager, etc.
- Anyone providing services to the IRA such as the trustee or custodian
Documentation Involved in Purchasing an Asset With a Self-Directed IRA
Documents required: contract and closing documentation.
Title as: “Midland Trust Company As Custodian FBO Client Name, Client Account Number.”
Note: the IRA owner must review and approve all closing documents before closing. Midland Trust signs on the IRA’s behalf.
Notes and Mortgages
Documents required: loan documents (including the mortgage or other agreement to secure collateral).
List as: “Midland Trust Company As Custodian FBO Client Name, Client Account Number.”
Note: Midland must review all loan documents. If the loan is not handled through an escrow agent (like an attorney or title company), Midland must have the original, pen-signed note before releasing funds.
LLC, LP, and Private Stock Investments
Documents required: operating/partnership agreement or subscription agreement.
List in subscription agreement as: “Midland Trust Company As Custodian FBO Client Name, Client Account Number.”
Note: Midland must receive approval for closely-held LLCs. Midland will sign the subscription agreement on the IRA’s behalf.
Midland requires paperwork or documentation proving the IRA is the owner of that particular asset with investments not listed above. Please contact Midland for any unique situations on how to title the asset correctly.